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dence demonstrates that the status quo has led to serious problems with credit reporting accuracy and completeness.

Second point: The furnishers of credit reporting data creditors, collection agencies and others—are responsible for many_accuracy and completeness problems. Provisions of the Fair Credit Reporting Act to require furnisher accountability need to be improved.

Third point, the dispute resolution process under the Fair Credit Reporting Act, which is supposed to help consumers resolve problems with credit reporting accuracy, is flawed and is becoming obsolete. It needs to be overhauled and modernized.

Now, let me touch on each of these points briefly and tell you that there is a lot of detail and specific recommendations in my written testimony on each point.

On accuracy, we agree with Howard Beals, the director of the Bureau of Consumer Protection at the Federal Trade Commission, in speaking about credit scoring and the trend towards credit scoring. He said, “Even small differences in a consumer's credit score can influence the cost or other terms of the credit offer, or even make the difference between getting approved or denied. Accuracy of the information underlying the score calculation is paramount.”

A study released by the Consumer Federation of America and the National Credit Reporting Association has found dramatic and costly discrepancies in credit scores in underlying credit information among credit repositories. We looked at half a million actual mortgage consumers seeking mortgage credit. Researchers then closely examined the files of consumers with scores near the 620 cutoff; this is the commonly known dividing line between prime lower-cost mortgage credit and sub-prime higher-cost credit.

The study found wide variations in credit scores for a given consumer among the three national credit repositories. The average discrepancy for all consumers was 41 points. The credit scores for nearly one in three consumers varied by 50 points or more. In credit scores for one in 25. varied by 100 points or more. This means that roughly 8 million consumers, one in five of those who are on this borderline, are likely to be misclassified as sub-prime upon applying for a mortgage.

A similar number of consumers are likely to benefit from errors in their report. However, I don't think anybody in this room would argue that individual consumers benefit from system-wide averages like this. And I don't think anybody in the room would agree that consumers should have to cope with a credit reporting system that functions like a lottery.

Falling below the cutoff score for prime mortgage can lead to a complete denial of credit or be extremely costly. We threw out an example in our written testimony. The upshot is we compare an Aloan, less than ideal credit, to an A loan. The consumer at A would pay $124,000 more in interest payments over the life of a 30-year fixed $150,000 mortgage. There is a detailed analysis in the testimony of this report.

Let me add that the Federal Reserve has come to similar completions about one aspect of the problem that we highlight, and that is the completeness of reporting by creditors. The primary area of concern that they identify with data integrity was that of missing credit limits. This can have a major detrimental effect on consumers' credit score and on their credit rating overall.

The Controller of the Currency has also raised concerns about complete reporting, as has the Federal Financial Institutions Examination Counsel, which brings me to closing and to highlight the second and third issues that I mentioned at the top.

If one of the major problems is inaccurate and incomplete reporting by the furnishers, then we need to go and look at many of the recommendations that have been thrown out by CFA and others to increase complete reporting by those furnishers. We suggest if they use the system, voluntary approach, if they use the credit reporting system, they need to report everything.

Finally, we need to look at our dispute resolution process. It doesn't allow consumers access to their credit score in most cases. Most States don't allow it and FICRA doesn't allow it, and it doesn't allow consumers to get quick, timely access to their report to correct errors and get that good credit offer, that good mortgage loan or that other offer of credit that they would like to get. It is a serious problem, and we need to look at modernizing the dispute resolution process.

Thank you.

[The prepared statement of Travis B. Plunkett can be found on page 182 in the appendix.]

Chairman BACHUS. Thank you, Mr. Plunkett.
Mr. Fishbein?

CENTER FOR COMMUNITY CHANGE Mr. FISHBEIN. Thank you, Mr. Chairman, and Mr. Sanders and members of the subcommittee.

My name is Allen Fishbein, and I am general counsel of the Center for Community Change. I want to thank you for the opportunity to testify today and share my thoughts at this hearing on the role of FCRA and the credit-granting process.

My written testimony focuses on a series of issues pertaining to the impact of credit scoring and automated underwriting in providing fair access to mortgage credit, which we think bears on the issues that are the concern of this hearing.

In 1969, during the debate on the original FCRA, Senator Proxmire spoke of the congressional intent behind the law, saying that the aim of FCRA is to see that the credit report system serves the consumer as well as the industry. "The consumer has a right to information which is accurate. He has a right to correct inaccurate or misleading information," said Senator Proxmire. "And he has the right to know when inaccurate information is entered into his file. The Fair Credit Reporting Act seeks to secure these rights.”

Referring to this legislative intent, last year, William Lund with Maine's Office of Consumer Regulation Stated, "Just as the FCRA demystified the storage and the use of credit information, credit scoring is now serving to re-mystify that process.” And we share the regulator's concern.

The rapid growth in the use of credit scoring and related technologies have worked to improve access to credit for many, particularly in mortgage lending. However, it also has added an additional veil of secrecy over the credit decision-making process. This veil has created uncertainty and suspicions among consumers about the role that these scoring technologies play as gatekeepers for obtaining credit. Lifting this veil, particularly for the mortgage lending arena, is long overdue, but is likely to require congressional action to achieve.

Let me highlight the main points that are in my written testimony in the time I have this morning, let me say that there have been great changes in consumer credit reporting and consumer credit decisions since FCRA was originally enacted, and even since the 1996 amendments. Computerized credit scores are contained in huge national databases today. Credit scoring and application scoring technologies play significant roles in a vast majority of the credit-granting decisions that are made.

Perhaps no area has changed greater than in mortgage lending. In less than a decade, mortgage loaning has gone from a largely manual decision-making process to an automated one. Predictably, fans of credit scoring say that it represents an improvement over manual underwriting, because it is more objective, it has a greater predictive value for judging which than does manual underwriting. The efficiencies that scoring provides permits expanded underwriting and has contributed to increases to homeownership overall and for increases in homeownership for the underserved.

They also say that scoring is fair and unbiased, but only the developers of these scoring systems know this for sure. Their confidence in the fairness of these systems must be accepted today as an article of faith, because these systems are very closely held and proprietary. Former President Reagan once said in another context, "Trust, but verify.” And that is our position about assessing the accuracy and fairness of the scoring models that are used today.

Concerns about the fairness and accuracy have been raised almost since these new systems have gone into effect in the mortgage area, and the stakes are higher than ever before. No longer is it just about access to credit, meaning affecting people at the margins, but the advent of risk-based pricing, which is being used more and more in mortgage lending and other areas of consumer credit, means that scoring also affects how much credit costs and the terms and conditions that are extended. In other words, it affects virtually every consumer. Consumers that do not meet the minimum cutoffs that credit scoring assigns are relegated to the higher priced sub-prime market.

The concerns about the scoring models in place are several fold. Research, as Travis and others have suggested, indicate significant inaccuracies and inconsistencies in the underlying credit reports. This represents a double-whammy, in effect. If the reports are inaccurate, then it is likely the credit scoring models are, as well. The CFA study indicate that one out of five of households are at risk of being misclassified, as a result of these inaccuracies, into the sub-prime market.

But regulators have also voiced concerns that certain creditors may be manipulating credit reporting systems in an effort to hang on to what they view as their most favorable customers by not reporting favorable information about their coustomers.

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There are also a host of methodological issues, including under representations of key demographic groups, such as low-income people and minorities, and important omitted variables from the credit scoring methodologies, such as non-traditional factors that may pertain to predictiveness: counting rent payments and utility payments, as examples.

And when pressed, all the purveyors of credit score models will acknowledge that minorities, African-Americans and Hispanics, are disproportionately adversely affected by the methodologies today in place. In other words, on average, minorities fare worse under credit-scoring methodologies than do white households.

This doesn't necessarily mean they are discriminatory. But given the legacy of lending discrimination and housing discrimination in this country, adverse impacts should be treated very seriously. And it should trigger very strict scrutiny, such as an effects test analysis, which would ensure that the factors and their weight are being used correctly in the models; second, that there is a business necessity for using these factors; and third, that less discriminatory approaches that would achieve the same ends are not available.

But despite these legitimate concerns, independent review and analysis has not been conducted to ensure the validity and the fairness of the scoring systems that are in common usage today. We urge, therefore, the establishment of an effective and meaningful oversight process, which would evaluate and regularly monitor the statistical scoring models that are used.

We think Federal agencies such as the FTC and HUD can be used for these purposes.

In conclusion, let me say such steps we believe are necessary to lift the veil of secrecy that exists. These steps are entirely consistent with the objectives of FCRA to ensure accurate credit reporting and are necessary in order to achieve full consumer confidence in credit decisions that are being made today.

Thank you, Mr. Chairman.

[The prepared statement of Allen Fishbein can be found on page 85 in the appendix.]

Chairman BACHUS. Thank you, Mr. Fishbein.

Mr. Gambill, before you testify, I want to say this to all members.

Mr. Gambill is CEO of one of the credit bureaus or credit reporting agencies.

And I want to commend you for testifying. Often, no matter where the fault may lie, it is directed at the credit reporting agency. You sometimes find yourself the whipping boy, even though someone may have supplied you with bad information or because someone is receiving a credit score that they don't like. So I think most of the members of this panel are knowledgeable of that fact and will bear that in mind during the questioning.

We welcome your testimony. And we also, I think that all the members of this panel realize the problems in the system, that we all work together. But I think we would all agree, including consumer groups, industry, et cetera, that credit reporting agencies are a valuable component of our lending and borrowing process and our economy, and perform a very fundamental role. So I thank you and welcome your testimony.


And thank you, Congressman Sanders, and members of the subcommittee for inviting me to be here today.

As you know, TransUnion is one of the nation's largest consumer credit information companies. We are a facilitator of commerce that provides credit granters with information and analytic tools that enable them to better understand their customers and make more informed decisions. And we provide consumers with choice, access, reliability and the promise of a robust and more stable economy. All of this relies on Federal preemption. Federal preemption brings uniformity to the risk management process that is inherent in the granting of credit.

Uniformity allows lenders to make fast, reliable business decisions on a national basis. Uniformity means consumers are treated equally and presented with a constantly evolving array of financial products and services uniquely tailored to meet their personal lifestyles and qualifications. Uniformity allows regulators to assess risk and take appropriate measures to protect the interest of depositors and the American public.

If Federal preemption were allowed to expire and each State, county or municipality are permitted to adopt their own laws, the credit reporting system will be severely fragmented, and the consequences to the consumer and our economy will be significant.

We have seen this play out in other markets around the world. In many countries, consumers, regardless of their credit profiles, don't have access to long-term mortgages at all or must pay interest rates of more than 20 percent on the loans that they can get. This is the direct result of the lack of a comprehensive and uniform credit reporting system. Consumers in those countries really have few options. They are generally tied to one institution, their bank, for all of their financial needs.

There has been a good deal of discussion before this subcommittee on identity theft and data accuracy issues. These concerns are not taken lightly by TransUnion, but should not override a law that, and I quote from legislative history, “recognizes the fact that credit reporting and credit granting are, in many aspects, national in scope, and that a single set of Federal rules promotes operational efficiency for industry and competitive prices for consumers.”

To address the concerns of identity theft and data accuracy, I believe we start with consumer education. Consumers are more engaged in the credit reporting process today than ever before. We believe the public and private sector must each take a role in ensuring consumers know their rights under the FCRA. And TransUnion has responded to the need for consumer education by making tools available that help individuals manage their financial help. We are committed to providing education to consumers through a multitude of channels, but our ability to do that, if we first have to find out their address, will be severely limited.

We make our living by accurately and efficiently processing 2 billion pieces of information into 192 million credit files every month, and we do it well. We recognize, however, that some consumers have questions and issues regarding the information in that file.

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